Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Cheniere Energy fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that a company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Cheniere Energy.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-year annual revenue growth > 15%

220.1%

Pass

 

1-year revenue growth > 12%

(7.5%)

Fail

Margins

Gross margin > 35%

59.8%

Pass

 

Net margin > 15%

(109.2%)

Fail

Balance sheet

Debt to equity < 50%

124.7%

Fail

 

Current ratio > 1.3

4.56

Pass

Opportunities

Return on equity > 15%

(43.1%)

Fail

Valuation

Normalized P/E < 20

NM

NM

Dividends

Current yield > 2%

0%

Fail

 

5-year dividend growth > 10%

0%

Fail

       
 

Total score

 

3 out of 9

Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes.

Since we looked at Cheniere Energy last year, the company has picked up a point, as its shareholder equity turned positive. But the shares have given investors a big reward recently, more than doubling over the past year, as shareholders increasingly look forward to a big project on the horizon.

Cheniere is far from a household name among energy companies, but it's seeking to become one. Earlier this year, the company and its Cheniere Energy Partners subsidiary got approval from the Federal Energy Regulatory Commission for a permit covering its planned Sabine Pass liquefied natural gas terminal. The move paves the way for the company to export plentiful and cheap U.S. natural gas to areas of the world where it's far more expensive, reaping arbitrage benefits.

Gas producers have jumped on the bandwagon to supply Cheniere's export capacity. For instance, just this week, Total made a deal to provide 2 million tons of LNG per year, boosting Cheniere's revenue projections going forward.

But Cheniere faces LNG competition, both domestically and internationally. Earlier this month, Sempra Energy applied for approval to build similar export facilities at its own Louisiana terminal, and ExxonMobil filed similar paperwork back in August to add LNG capacity at its Port Arthur plant. With ConocoPhillips looking at LNG production in Australia, and several companies looking northward to take advantage of Canadian opportunities, Cheniere needs to work hard to make the most of its first-mover advantage.

For Cheniere to improve, paying a dividend from the cash flow that could result from its exports will definitely be a step in the right direction. With the Sabine Pass plant years away from completion, though, don't expect a fast move toward perfection for Cheniere.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Cheniere has great long-term prospects, but if you're looking for a stock to deliver great results right now, check out which stock the Motley Fool's chief investment officer has selected for his No. 1 pick for the next year. You'll find it in our brand-new free report, "The Motley Fool's Top Stock for 2013." Don't wait; click here to access the report and find out the name of this under-the-radar company.

Click here to add Cheniere Energy to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

The article Has Cheniere Energy Become the Perfect Stock? originally appeared on Fool.com.

Fool contributor Dan Caplinger has no positions in the stocks mentioned above. The Motley Fool owns shares of ExxonMobil. Motley Fool newsletter services recommend Total. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.


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